I guess you also want to know why you need a Demat account for mutual funds. That is why you are here right? But before we go into the why let us look at what Demat account is as well as what mutual fund is.
Demat Account
A dematerialized or Demat account is an account that allows investors to hold securities in a dematerialise or electronic form. A Demat account can hold shares, bonds, mutual funds, government securities and exchange-traded funds.
Two different entities are involved in the Demat account which is depository and depository participants. The depository is one in charge of managing investors’ financial investment and depository participants are like intermediaries or agents between investors and depositors. For you to have a good investment and trading journey as a beginner you need to choose the best Demat account.
Why Use Demat Account
There is no need for much paperwork when trading for securities.
Easy transaction and management of your securities.
No loss or damage to physical certificate.
Quick and easy transaction process.
Easy change of information.
The risk of investing in unlisted shares can be avoided.
Any type of securities can be kept in a demat account.
And yes there are also some downsides to demat accounts.
A Demat account holder can be at risk of internet fraud if care is not taken. You are required to pay maintenance fees that differ from one broker to another.
Mutual fund
A mutual fund is an entity that pools cash from various investors for investment purposes which can be shares, stocks, bonds and other assets. The profit from these diversified pools is shared with the investors in the funds as agreed in the fund prospectus. In most cases Mutual funds are usually classified by their principal investment such as a bond or fixed-income fund, stock or equity funds, money market funds and others. But the main categories are debt mutual funds – which invest in fixed income and equity mutual funds – which invest in stock. Due to the level of diversification that mutual funds offer, investing in a mutual fund is being considered a safe investment.
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Advantages of Mutual fund
Diversification: the fund manager has to spread your investment into various company stocks, industries and sectors because the performance of the equity fund is based on stock market movement.
Liquidity: it is very easy to buy and exis a mutual fund scheme unless you go for closed-end mutual funds.
Managed by an expert: if you don’t have time to research and the skill needed you don’t have to worry as everything will be taken care of by a fund manager.
Low charges for big transactions: by buying multiple mutual fund units at the same time you get a lower commission and processing fee in comparison to buying one unit.
Different Between Demat Account and Mutual Fund
A demat account is just a platform that holds investments such as mutual funds or shares in electronic form. A mutual fund is an investment that can be of any type and is managed by a professional investment manager. The aim is for the retail investors to get rewarded.
So back to why a demat account is required for mutual funds. Mutual fund investors can hold their unit in Demat account or statement of account, both of which do not involve physical certificates. So an investor doesn’t need to have a demat account before he or she can buy or redeem mutual fund shares. Though there are a lot of benefits to having one.
An investor can buy mutual fund shares through an electronic transfer without a broker with a demat account. Also, there will be no need for investors to hold physical fund certificates when redeeming shares.
The process of buying mutual fund investments becomes easy and quick through demat accounts. Investors that want to manage their account can easily do funds comparison, selection and review online. Easy process of transmitting funds unit to the nominee in case of death befalling the account owner.
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Demat account eliminates the risk involved with the use of a physical form of paper documents. Every time a transaction is being carried out in your account you automatically get updated. By mapping out your demat account to an online portfolio you can see all the values in real-time.
For someone that wants to venture into an investment, the question now will be how do I get the best Demat account for a mutual fund? Well, there is a lot you could find online depending on your preference.
Conclusion
By now you should be able to see why a Demat account is required for a mutual fund. Though is not compulsory you have one before you can invest in a mutual fund is just a matter of choice.